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November 2018

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Tax Planning

Tax Planning

By definition, tax planning is the legal use of the tax regime to one’s advantage using methods and techniques to reduce a company’s or individual’s taxation footprint in their jurisdiction. The coined terms tax avoidance vs. tax evasion being a practical paradigm as to the former being legal and the latter not.

Often there is a very thin line as to what can be considered avoidance or evasion and has always been a topic of technical debate among taxation experts universally. At Aidelco, our consultants have spent the best part of their professional years knowing the difference and using methods and techniques always observant of global GAAR statutes (general anti-avoidance rules), to the extent it applies in the client’s jurisdiction.

A company or individual ‘’moving’’ to a jurisdiction classed and traditionally scrutinised as an offshore tax haven is not always necessary. In some cases, moving to a country not traditionally seen as an offshore tax haven, but nevertheless has a very low tax rate is possible and is much less criticised. A practical example is Bulgaria, a European Union country outside of the Eurozone and a very well known outsourcing (BPO) centre. Corporate income tax as well as personal income tax in Bulgaria are both levied at a flat 10%.

Bulgaria

When starting a business activity or company in an industry where location is of little importance, such as online portals and e-businesses, an entrepreneur could consider opening up in a country where operating costs as well as the taxation rates are low. Aidelco has extensive experience in formulating viable business plans and opening companies for this purpose in Eastern Europe, Bulgaria especially. As a practical example, read the story of John Hazelwood, a true case study of an American entrepreneur who was advised from lawyers and advisors to open in Silicone Valley, but defied all advice and opened up in Bulgaria instead. Read how his story worked out .

Most countries impose taxes on income earned within the country of operation. The majority of these countries however have also entered into bilateral taxation treaties to avoid taxing non-residents twice. Technically speaking, when withholding tax is levied and a permanent residence certificate as well as proof of withholding tax is obtained before annual tax declaration, the service provider (who issued the invoice) can claim it in his country as tax credit. Note that only two countries currently impose tax on worldwide income, the United States and Eritrea (Even in this case there is a solution, contact us).

Cyprus

Cyprus has concluded till date over 45 Double Taxation Treaties and many more are in the negotiation stages. The main purpose of these treaties is the avoidance of double taxation on income earned in the countries that have signed these agreements with Cyprus. By using Cyprus as an offshore solutions or in combination with another offshore jurisdiction, the impact of withholding taxes on service invoices can be minimised or even legally eliminated altogether.

In most countries, especially in Europe, a physical person becomes liable for taxation earned in that country when he is considered a ‘’tax-resident’’. Tax residency is defined when that person resides in the country 183 days or more within a calendar year. Reducing your tax footprint could be as simple as going across the border at the right time.

Tax or corporate inversion is the relocation of a company’s headquarters to a country where the tax rates are lower, while still maintaining material operations in the country with the higher tax rate. Depending on the country of operation and whether there are anti-incentives In place against inversion practices, inversion can still be achieved via mergers in countries with lower tax regimes. Aidelco has experience in multiple inversion projects of various sizes.

Nearshoring is the practice whereby operating expense and tax obligations are transferred to a neighbouring country where these burdens are significantly less. In practice, ‘’expensive to run’’ departments like supply chain or IT are closed down in country A. A new company is formed in country B, whereby these departments are integrated into a company, essentially creating a type of outsourcing. The benefits are cheaper operating costs with the added benefit of lower tax burden. This practice is also widespread in the IT industry where technological work can essentially be outsourced anywhere. Prevalent examples can be found in Eastern European countries like Bulgaria and Hungary. For more information on this, consult our nearshoring section.

Especially in countries where income is taxable according to worldly income, a second citizenship in a country with a lower tax regime is not an impossibility. A European Passport can be assured and if you’re in a hurry, there is even a fast-track system available. We can assist in these matters. The countries we usually work with is Bulgaria and Cyprus. If you’re interested, contact us for more information.